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TWN
Info Service on WTO and Trade Issues (Nov26/03) WTO:
China launches major salvo in reform talks on LPF issues Geneva, 4 Nov (D. Ravi Kanth) -- China has launched a proverbial salvo in the ongoing World Trade Organization (WTO) reform discussions on "level playing field" (LPF) issues, calling for "fact-based rather than label-driven" approaches to various issues in this controversial track, which is the "brainchild" of the United States, the European Union, and Japan. For several years, the US, the EU, and Japan have formed a trilateral initiative to introduce new disciplines targeting the different forms of subsidies allegedly provided by China to its state-owned enterprises, according to people familiar with the development. Against this backdrop, China on 2 November floated a comprehensive proposal (WT/GC/REFORM/W/22), titled "Further reflections and suggestions on relevant level playing field issues under WTO reform." The proposal seeks "a common and fact-based understanding as to when financing constitutes subsidies under WTO rules" and aims to ensure that the WTO serves as a "multilateral forum for dialogue and coordination on industrial policies from a trade and investment" perspective. China has championed discussions on trade and investment at the WTO since 2015, when it launched a plurilateral initiative called the Investment Facilitation for Development Agreement (IFDA). The agreement has yet to be incorporated into Annex 4 of the Marrakesh Agreement, which lists the plurilateral agreements. India has consistently opposed the inclusion of trade and investment in the WTO acquis, arguing that investment was never part of the General Agreement on Tariffs and Trade (GATT)/WTO agreements. In a follow-up to its earlier proposal (WT/GC/REFORM/W/12), "China's further reflections and suggestions on WTO reform", Beijing said its latest proposal draws on "constructive exchanges with Members, including those relating to the industrial policy coordination and distinguishing between the positive and negative effects of subsidies." SUBSIDIES & LPF China begins by clarifying the broader purpose of subsidies, stating that they "are one of the tools governments use to intervene in markets in pursuit of public policy objectives." It adds that subsidies "take many forms and are widely used across sectors in economies at different stages of development." The proposal examines the WTO framework governing subsidies, arguing that "the ASCM [Agreement on Subsidies and Countervailing Measures] constitutes an integral component." According to China, the ASCM rests on five key determinants: First, it defines what constitutes a subsidy, establishing a measure-based approach to determining the scope of its application. Second, it classifies subsidies and establishes differentiated disciplines, taking into account the degree of trade and competitive distortions, the adverse effects on the interests of other Members, and the need to accommodate legitimate public policy objectives. Third, it provides necessary remedies while seeking to guard against their misuse for protectionist purposes. Fourth, it establishes institutional mechanisms and ensures effective implementation through subsidy notifications, multilateral surveillance, and dispute settlement. Fifth, it provides for Special and Differential Treatment for developing Members. China said that these five determinants "should remain the basis for subsidy governance and the maintenance of a level playing field." WTO reform, according to China, "may examine how each aspect of the framework can be better adapted to new circumstances and emerging challenges, and more effectively address Members' level playing field concerns." UPDATING ASCM China has offered three observations on updating the ASCM disciplines. A. Proliferation of subsidies that undermine fair competition China argues that subsidies that undermine fair competition are proliferating, with significant cross-border impacts, and that targeted multilateral disciplines are needed. Without naming countries, China said that "in recent years, many Members have increasingly relied on subsidies as a key instrument to support specific domestic industries." It adds that "certain forms of measures fail to give due regard to the market's decisive role in resource allocation, leading to resource misallocation and waste, sometimes triggering a "race to the bottom"." China further maintains that "some measures, being explicitly discriminatory and exclusionary, are designed to suppress competitors, fragment global markets, and forcibly reshape global industrial and supply chains." It argued that "such measures can seriously distort the level playing field and have attracted widespread attention among WTO Members." B. Subsidies and legitimate policy objectives China said that "Members rely on subsidies to pursue legitimate policy objectives, but insufficient international coordination can undermine its effectiveness." Reflecting on comments made by members during the WTO reform discussions, China said that "subsidies can play a vital, positive role in correcting market failures, promoting industrialization, and responding to global challenges, including climate change, poverty reduction, and technological innovation." China argued that "the original inclusion of non-actionable subsidies in the ASCM reflected a consensus among Members at the time." However, it said that "given the increasingly complex policy objectives and spillover effects associated with subsidy policies today, Members have yet to develop a common understanding of legitimate policy objectives, sound policy design, and their effects." Moreover, "international coordination and mutual peer learning remains inadequate," China said, pointing out that "at the multilateral level, this limits Members' ability to realize the benefits of subsidies as a legitimate policy instrument, while managing their potential adverse effects." C. Lack of objective assessment China contends that "the lack of an objective assessment of subsidies undermines efforts to build a shared understanding of a level playing field." It notes that "Members hold divergent views and use different methodologies to define and assess the scope and effects of subsidies, further eroding mutual trust." China, which has repeatedly faced criticism from the US, the EU, and Japan over alleged "overcapacity" and "overconcentration", argued that "unsubstantiated narratives mischaracterize ordinary commercial activities as subsidies, attribute shifts in competitiveness and market shares simplistically to subsidies, and portray the outcomes of market competition as evidence of alleged subsidy-induced "overcapacity" or "overconcentration"." "Such flawed "diagnoses" have been used to justify unilateral measures and even to undermine the fundamental principles of the WTO," China said. Against this backdrop, China called for "fact-based rather than label-driven" approaches to guide future deliberations. It urged members to consider the following questions: a. Is there a need for targeted disciplines on additional forms of subsidies that Members generally consider to seriously distort fair competition and international trade? If so, how should such disciplines be designed under the existing ASCM framework? b. How can current subsidy rules be improved to better enable subsidies to achieve legitimate public policy objectives, such as green transition or industrialization, while duly accounting for their impact on fair competition? FINANCING & LPF In its proposal, China said that "access to financing on fair, reasonable, and sustainable terms is essential for WTO Members, particularly developing Members, to advance industrialization, participate in international trade, and achieve development." It added that "it is also fundamental to fostering a level playing field." Given the huge disparities in global financing conditions, which continue to adversely affect the economic prospects of developing countries, China argues that "subsidies in the form of preferential financing" can serve as a policy instrument. China said that "discussions on the level playing field under WTO reform should first seek to establish a common and fact-based understanding of when financing constitute subsidies under WTO rules, and then consider how to appropriately discipline those subsidies that give rise to trade-distorting effect," while ensuring that developing countries are not impeded from accessing financing on fair and reasonable terms. China has identified several financing-related issues that pose challenges to a level playing field. 1. Mischaracterization of ordinary financing as "below-market finance" China said such determinations, frequently observed in certain Members' countervailing duty investigations and in studies by some international institutions, stem primarily from the failure to make an objective comparison between actual financing terms, such as interest rates, and comparable terms available in the market (the "market benchmark"). Such comparisons are needed to ascertain whether, and to what extent, a "benefit" has been conferred. 2. The mistreatment of cross-border financing as "transnational subsidies" Several industrialized countries have alleged that China provides transnational subsidies. China said that "certain Members have advanced this concept that goes beyond the existing WTO rules framework, and applied the flawed benchmarking methodologies described above to characterize normal cross-border financing activities as subsidies subject to regulation and trade-restrictive measures." China argued that such practices inherently presume that the recipient is unable to obtain financing for industrialization on market terms. It said that such practices cast a severe "chilling effect" over cross-border trade and investment cooperation, particularly hindering developing Members from mobilizing the external financing urgently needed for their industrialization. 3. Export credit rules China argues that the way export credit rules are framed raises questions about whether the realities and interests of developing Members are properly reflected. According to China, "under the "safe haven" clause under the ASCM, the authority to set rules determining whether officially supported export credits constitute prohibited subsidies rests effectively with the Organisation for Economic Co-operation and Development (OECD)." China said that "rules crafted by a few Members thus disproportionately dictate the export credit terms available to the wider membership as buyers or sellers, with spillover effects on other financing." In short, "without the participation of a broader range of developing Members, whether these risk classifications and pricing mechanisms reflect actual risks, or instead artificially inflate financing costs, requires appropriate scrutiny." For further discussions, China underscored the need to explore several concerns: i. How can we ensure that appropriate and comparable market benchmarks are used, so that ordinary financing is not mischaracterized as a subsidy? ii. How can we ensure that Members, particularly developing Members, can access affordable external financing needed for their industrialization and participation in global trade without such financing being mischaracterized as "transnational subsidies"? iii. How can the needs and realities of all WTO Members, particularly developing Members, be adequately reflected in shaping international rules on export credits that affect their financing and trade interests? INDUSTRIAL POLICY Under the subheading "industrial policy dialogue and coordination," China said that "the use of industrial policies to address the limitations of market forces has been an economic reality, common in WTO Members at different stages of development." However, "poorly designed or implemented industrial policies may distort competition and give rise to trade frictions and tensions." Against the backdrop of the "different views on fundamental aspects of industrial policies and their effects on trade," China cautions that "without sufficient dialogue, these differences may deepen policy misunderstandings and exacerbate trade frictions." China said that "the WTO could serve as a multilateral forum for dialogue and coordination on industrial policies from a trade and investment perspective." China's comprehensive proposal on "level playing field" issues appears to have remained silent on another major LPF issue concerning agricultural subsidies, which remain in limbo despite the Doha work program and Article 20 of the Agreement on Agriculture, said people familiar with the discussions. +
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